Mortgage Insurance for the Texas Exam: PMI, MIP, VA Fee

Mortgage insurance is a small topic with one big trap: candidates assume it protects the buyer. It does not. It protects the lender. Get that straight, and the rest is just matching each loan type to its insurance. This spoke deepens a point from the types of mortgages and loans pillar.

Every low-down-payment loan carries some form of insurance or fee, because a small down payment is riskier for the lender. The name and the rules differ by program. Let us start with who it protects, then take each program in turn.

What is mortgage insurance, and who does it protect?

Snippet answer: Mortgage insurance protects the lender, not the borrower, against loss if the borrower defaults. Lenders require it when the down payment is small, because less equity means more risk. The borrower pays for it, but the coverage benefits the lender. This is the single most tested point about mortgage insurance, so do not confuse it with insurance that protects the homeowner.

Here is the core idea, and the exam tests it directly. Mortgage insurance is paid by the borrower but protects the lender. If the borrower defaults and the property sells for less than the loan balance, the insurance covers the lender's loss.

Lenders require it whenever the down payment is small, generally under 20 percent, because a thin equity cushion leaves the lender exposed. So the borrower with little money down pays for coverage that shields the lender. Do not confuse this with homeowners insurance, which protects the owner's property, or with title insurance, which protects against title defects. Mortgage insurance protects the lender against default loss.

PMI on conventional loans

Snippet answer: Private mortgage insurance, or PMI, applies to conventional loans when the borrower puts down less than 20 percent. It is usually paid monthly. The borrower can request cancellation once the loan reaches 80 percent of the original value, and by federal law the lender must automatically cancel it at 78 percent, provided the borrower is current. PMI is the cancellable form of mortgage insurance.

PMI is the conventional-loan version. When a conventional borrower puts down less than 20 percent, meaning the loan exceeds 80 percent of value, the lender requires private mortgage insurance, usually added to the monthly payment.

The good news for the borrower is that PMI is temporary. Under the federal Homeowners Protection Act, two thresholds matter. The borrower can request cancellation once the loan is paid down to 80 percent of the original value. And the lender must automatically cancel PMI at 78 percent, as long as the borrower is current on payments. There is also a backstop: PMI must end by the midpoint of the loan term if it has not already. The theme to remember is that PMI is cancellable as equity grows, which ties to the loan-to-value ratio.

MIP on FHA loans

Snippet answer: FHA loans carry a mortgage insurance premium, or MIP, in two parts: an upfront premium added at closing and an annual premium paid monthly. Its duration is the key contrast with PMI. If the borrower puts down less than 10 percent, MIP lasts the life of the loan. If the borrower puts down 10 percent or more, MIP can be removed after 11 years. FHA requires MIP regardless of the down payment.

FHA loans use MIP instead of PMI, and it works differently. There are two pieces. An upfront premium is added to the loan at closing, and an annual premium is spread across the monthly payments. Every FHA borrower pays MIP, no matter the down payment.

The duration is what the exam contrasts with PMI. On a low-down FHA loan, the MIP often does not go away. If the down payment is under 10 percent, MIP lasts the life of the loan. If the down payment is 10 percent or more, MIP can be removed after 11 years. So while PMI cancels as equity builds, FHA MIP on a minimal down payment can stay for the entire loan. Remember it as PMI cancels, FHA MIP often does not.

The VA funding fee

Snippet answer: VA loans do not charge monthly mortgage insurance. Instead, the borrower pays a one-time VA funding fee, a percentage of the loan that can be financed into the amount borrowed. The fee is higher for later uses of the benefit and for smaller down payments. It is waived for veterans receiving VA disability compensation. No monthly insurance plus a one-time fee is the VA signature.

The VA loan handles this differently and more favorably. There is no monthly mortgage insurance at all. In its place, the borrower pays a one-time VA funding fee, a percentage of the loan amount that can be rolled into the financing rather than paid in cash.

Two details matter for the exam. The fee is higher for a second or later use of the VA benefit than for a first use, and a larger down payment lowers it. And importantly, the funding fee is waived for veterans who receive VA disability compensation, along with certain surviving spouses. The exact percentages are current-year figures that change, so confirm them, but the concept is stable: no monthly insurance, one financeable fee, waived for a service-connected disability.

The USDA guarantee fee

Snippet answer: USDA rural loans do not use PMI either. They charge a guarantee fee in two parts: an upfront fee added to the loan and a smaller annual fee paid monthly. The fees function like mortgage insurance for the USDA program and are lower than FHA MIP over the life of the loan. Pair USDA with an upfront plus annual guarantee fee, similar in structure to FHA but cheaper.

USDA loans round out the set. Like the others with little or no down payment, they need a form of insurance, which USDA calls a guarantee fee. It comes in two parts, an upfront fee added to the loan and a smaller annual fee collected monthly.

Structurally, this looks like FHA MIP, an upfront charge plus an annual one, but the USDA fees are generally lower over the life of the loan. For the exam, you rarely need the exact numbers. You need to know USDA replaces PMI with a two-part guarantee fee.

Comparing the four programs

Snippet answer: Conventional loans use cancellable PMI when down payment is under 20 percent. FHA loans use MIP with an upfront and annual part that often lasts the life of a low-down loan. VA loans use no monthly insurance and a one-time funding fee, waived for disability. USDA loans use a two-part guarantee fee. All of them protect the lender, and all are triggered by a low down payment.

Lay the four side by side, and the pattern is clear.

The unifying facts are simple. All four protect the lender, and all four exist because of a small down payment. The differences are in the form and, most importantly, in whether the coverage can be removed. PMI is the one that cancels cleanly as equity grows.

How to study mortgage insurance for the exam

Snippet answer: Anchor mortgage insurance on one fact: it protects the lender, not the borrower. Then match each program to its coverage: conventional uses cancellable PMI, FHA uses MIP that often lasts the loan's life, VA uses a one-time funding fee with no monthly insurance, and USDA uses a guarantee fee. Learn the PMI cancellation thresholds, 80 percent by request and 78 percent automatically.

Keep it simple. Start with the protects-the-lender fact, because it is the most tested and the most misunderstood. Then attach each loan program to its insurance form, and learn the one number set that appears often: PMI cancels at 80 percent by request and 78 percent automatically.

Tie this spoke to its neighbors. The types of mortgages and loans pillar introduces the programs, the loan-to-value and down payment guide drills the equity math behind cancellation, and the Closing Disclosure and TRID spoke shows where these costs appear at closing.

Frequently asked questions

Does mortgage insurance protect the buyer? No. Mortgage insurance protects the lender against loss if the borrower defaults. The borrower pays for it, but the coverage benefits the lender. This is the most common misconception and the most tested point. It is different from homeowners insurance, which protects the property, and title insurance, which protects against title defects.

When can PMI be removed from a conventional loan? The borrower can request cancellation once the loan reaches 80 percent of the original value, if they are current on payments. Under the federal Homeowners Protection Act, the lender must automatically cancel PMI when the loan reaches 78 percent, and PMI must end by the midpoint of the loan term at the latest. This makes PMI the cancellable form of mortgage insurance.

Why does FHA MIP sometimes last the whole loan? Because of the down payment. On an FHA loan with less than 10 percent down, the annual MIP lasts the life of the loan and cannot be canceled by building equity. With 10 percent or more down, MIP can be removed after 11 years. This durability is the key difference from conventional PMI, which cancels as equity grows.

Do VA loans have monthly mortgage insurance? No. VA loans have no monthly mortgage insurance. Instead, the borrower pays a one-time VA funding fee, which can be financed into the loan. The fee is higher for later uses of the benefit and lower with a bigger down payment, and it is waived for veterans receiving VA disability compensation. No monthly insurance is a major VA advantage.

Practice questions

1. A buyer asks whether the PMI on their conventional loan will protect them if they lose their job and default. The best answer is: A. Yes, PMI covers the borrower's payments B. No, PMI protects the lender, not the borrower C. Yes, PMI pays off the loan for the borrower D. No, but only because this is a conventional loan

Answer: B. Mortgage insurance protects the lender against loss on default, not the borrower. The borrower pays for it, but it does not cover their payments or pay off their loan (A and C). This is true for PMI regardless of loan type (D).

2. A conventional borrower wants to stop paying PMI. Under federal law, the lender must automatically cancel PMI when the loan reaches: A. 90 percent of the original value B. 80 percent of the original value C. 78 percent of the original value D. 50 percent of the original value

Answer: C. Under the Homeowners Protection Act, the lender must automatically cancel PMI at 78 percent of the original value, provided the borrower is current. The borrower can request cancellation earlier at 80 percent, but automatic termination is set at 78 percent.

3. A buyer puts 5 percent down on an FHA loan. What happens to the annual MIP? A. It cancels automatically at 78 percent B. It lasts the life of the loan C. It is waived entirely D. It can be removed after 2 years

Answer: B. On an FHA loan with less than 10 percent down, the annual MIP lasts the life of the loan and cannot be canceled by building equity. The 78 percent automatic cancellation is a conventional PMI rule (A), and MIP is not waived or removable after 2 years here (C and D).

4. Which statement about VA loans is correct? A. They charge monthly mortgage insurance like FHA B. They charge a one-time funding fee and no monthly insurance C. They require PMI until 20 percent equity D. They never charge any fee to any borrower

Answer: B. VA loans have no monthly mortgage insurance and instead charge a one-time funding fee that can be financed. They do not use FHA MIP or conventional PMI (A and C). The funding fee is waived for disability-compensation recipients, but not for every borrower (D).

Sources and methodology

This guide was written from primary federal sources and reverified on July 21, 2026. Insurance rates and fees are current-year figures that change, so confirm any number before quoting it to a client.

• The core principle that mortgage insurance protects the lender, and that it is required for low-down-payment loans, comes from standard mortgage lending practice and lender guidance.
• The PMI cancellation thresholds, request at 80 percent and automatic termination at 78 percent, plus the midpoint backstop, come from the federal Homeowners Protection Act of 1998.
• The FHA MIP structure, the upfront and annual premiums, and the duration rules tied to the 10 percent down payment come from HUD FHA mortgage insurance guidance.
• The VA one-time funding fee, its variation by use and down payment, and the disability waiver come from VA loan guidance. The USDA two-part guarantee fee comes from USDA Rural Development.

Verify all mortgage insurance rates, fees, and cancellation rules against the current agency sources before you rely on them in practice.

Official source links

• CFPB, Homeowners Protection Act and PMI Cancellation
• HUD, FHA Mortgage Insurance
• VA, Funding Fee
• USDA, Single Family Housing Guaranteed Loan Program

This article is exam-prep education for the Texas real estate sales agent license. It is not lending, financial, or legal advice, and it does not create an agency relationship. Mortgage insurance rates, fees, and cancellation rules change and depend on the borrower and loan. Always confirm the current CFPB, HUD, VA, and USDA sources and work under the supervision of your sponsoring broker before acting.